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Last Updated : Jul 20, 2020 03:25 PM IST | Source: Moneycontrol.com

SEBI’s RIA norms: How the client-investment advisor relationship is set to change

If you go to an RIA for financial planning and investing advice, here’s how your relationship will change

On July 3, the capital market regulator, Securities and Exchange Board of India (SEBI), amended its Investment Advisers regulations. Over the years, SEBI has sought to increase the number of registered investment advisor (RIAs) in the country because they have to adhere to strict compliance standards. SEBI has also periodically nudged mutual fund distributors (MFDs) to get RIA licenses. RIAs charge customers and do not earn commissions from fund houses for suggesting schemes. An MFD, on the other hand, earns commission income and does not charge fees for scheme purchases. If you go to an RIA for financial planning and investing, here’s how your relationship will change.

Advice and execution separated

RIAs working on their own can now run an advisory business (and charge fees) or distribute MFs (and earn commission), not both. Many RIAs have been carrying out advisory and distribution ctivities, under one roof. RIA firms can advise and distribute, but not to the same customer. The choice rests with customers as to which service to opt for. “Earning commissions from mutual funds and charging fees to the same client was a wrong practice. It goes against all fiduciary standards. The two needed to be separated,” says Harsh Roongta, a Mumbai-based RIA.


Some individual RIAs are not happy because unlike a corporate firm that can deliver both services, your individual RIA will now have to choose one over another. A Mumbai-based MFD who is also an RIA says most customers are hesitant to pay for investment advisory services. Of the roughly 1,000 clients he has, just about 5 per cent have switched to advisory. So, they pay a fee for his services and invest in direct plans. “I have separate offices for both my advisory and distribution divisions. But now, as an individual advisor, I cannot offer both,” he says, requesting anonymity. He is contemplating giving up his RIA license soon, as he says his distribution business is more than 35 years old and he earns a significant chunk of his income as commissions.

How much fees can your advisor charge?

SEBI will most likely put a ceiling on fees at Rs 1.25 lakh a year per family or 2.5 per cent of assets under advice. The fee limit is not much of an issue with the RIA community as most of them charge way below this level. But, it’s the manner of charging that can get tricky.

SEBI may ask RIAs to either charge a fixed or a percentage fee based on the quantum of assets under advice. In reality, advisors charge you a bit of both, depending on how they service you. Many charge a fixed fee at the start when they make a detailed financial plan. Then, every year, as part of maintaining your portfolio and advising, they charge based on your assets (a percentage).

Suresh Sadagopan, Founder of Ladder7 Financial Advisories, says that a financial plan prepared upfront is a finite task, at the completion of which clients must make the payment. Later, he says, a percentage fee can be paid as the relationship continues. “Besides, an RIA can provide many other consultations in between for which it’s tough to put a percentage fee because there are no assets involved, for instance loan advisory or say someone has sold a house, gets a large sum and needs advice to deal with the cash,” says Suresh.

Your RIA should be qualified

While the original regulations of 2013 had specified certain minimum qualifications for your RIA, SEBI has now strengthened them further. Your principal advisor should be a post-graduate in any finance discipline, a certified financial planner, and have five years’ work experience in investment management and financial advice.

The relationship manager should be qualified as mentioned earlier, but needs two years’ work experience in investment management and financial advice. Existing RIAs don’t have to adhere to this added qualification rules. However, new ones can come aboard only with the new qualification norms.

Advisors feel that a post-graduate education coupled with five years’ job experience raises the entry barrier. Particularly challenging is the requirement for relationship managers or as SEBI calls them ‘persons associated with investment advice.’ “Hiring such managers is going to be very costly because they would now be post-graduates. Will individual financial planners be able to hire MBAs as relationship managers,” wonders Vishal Dhawan, founder and CEO, Plan Ahead Wealth Advisors.

Enhanced net worth mandated

Individual RIAs must have a net-worth of Rs 5 lakh, up from Rs 1 lakh earlier. RIA firms must now have a net-worth of Rs 50 lakh, double the earlier requirements. Individual advisors who have more than 150 clients now have to get registered as ‘non-individual advisors.’ In other words, they have to cough up additional net-worth – from Rs 5 lakh, all the way up to at least Rs 50 lakh – to remain in this profession. Many advisors that Moneycontrol spoke to say this could be a big challenge.

Experts say that here’s where large distribution platforms can serve as a template. Apart from distributing, these platforms also on-board RIAs who can still service their own clients and piggyback on the platform without having to worry about shelling out a higher.

iFast is a firm that operates in such a format.

In a way, these platforms become the structure for individual advisors who have trouble setting up a corporate entity on their own. “Some platforms also have a unique way of allowing their advisors to charge fees. Instead of asking customers to write a separate check for advisory fees every year, they simply sell units of the investor’s mutual fund; most probably a liquid fund where some money is consciously kept for such purposes. Of course, clients are kept well-informed, but the fee is charged at the back-end; the customer is not bothered and, collection, therefore, is easier,” says Kirtan Shah, chief financial planner, Chief Financial Planner, SRE Ltd.

The way you deal with your advisor may well undergo a big change if she hops on to such a platform when the time comes.
First Published on Jul 20, 2020 08:49 am